Big Blue to embiggen itself even more on your big data

IBM hosted its annual Investor Briefing at the Almaden Research Center in Silicon Valley on Thursday, and the top brass of the company spent many hours trying to prove to Wall Street that Big Blue was not going to have another near-death experience as the IT industry goes through another gut-wrenching transformation.

Having learned its lesson during the client/server era of the early 1990s, IBM has become paranoid – like Intel has always been – and is obsessed with constantly reinventing itself in a relentless pursuit of ever-higher profits. And, explained CEO Ginni Rometty and her management team to the assembled analysts, Big Blue is not only up to the task of constantly re-engineering itself, but intends to make a business out of showing others how to do it, as well.

Rometty spoke about having met with around 500 CEOs worldwide between May and December of last year – which was five times as many as she planned to do, by the way. She said every conversation was more or less the same, starting off with politics, then moving on to the economy, then turning to the issues of productivity, and then capitalizing on "the confluence of big data, mobile, social, and cloud – all at the same time," as she put it.

"Every conversation ends with the idea that big data will be the basis of competitive advantage for every company, every industry, for the next decade," Rometty explained. "It is going to drive IT, and I think it is going to drive business and society, by the way." And to pursue that opportunity, IBM is going to be adopting a stance of "continuous transformation."

That means you are going to be on your toes and flexible if you want to work at Big Blue during the next decade.

IBM's original genius was in electromechanical tabulation and various other kinds of devices including mundane things such as typewriters and printers, and it was very much a company of engineers as the upstarts running services on hyperscale data centers are today. IBM was more about mechanical engineering than software engineering, and the engineering mindset prevailed. Neither company founder Thomas Watson nor his son Tom Jr. had engineering degrees, but the engineers have been in charge at key times in recent decades.

Starship Captain IBM CEO Ginni Rometty

Rometty is herself an engineer (compsci and EE, Northwestern University), and so is CFO Mark Loughridge (mechanical engineering, Stanford University). Business transformation exec Linda Sanford has a degree in math education and then a master's in operation research from RPI. Most of the of the software and systems division staffers have engineering backgrounds – and if they don't it is because they have been in the business for so long that there were not yet formal compsci degrees to get and they came to the mainframe from other fields.

It is probably not a coincidence that John Akers, who got a degree in industrial administration from Yale and who was also a Navy pilot, was the IBM CEO who ran IBM onto the rocks in the early 1990s, perhaps because he understood people and business better than he understood information technology.

Louis Gerstner, who replaced Akers from outside IBM in 1993, had an engineering degree from Dartmouth University. Sam Palimsano, who followed Gerstner and preceded Rometty, was a history major at Johns Hopkins University and also an offensive lineman for the football team who was possibly good enough to go pro. That's not quite an engineer, and it may explain why Gerstner made the financial engineering plan to keep Big Blue together, and Palmisano really followed through with the plan in the 2000s.

How relevant all of that engineering experience is may be debatable, but it's fun to speculate just the same, and an engineering degree is still one of the very best things you can have if you are going to blow your parents' dough (or your own) on the college experience. Getting into Harvard and dropping out before matriculating has worked well for some, as BillG and Zuck demonstrate. But that's not as reliable of a plan.

The point is, IBM is very keen on constantly re-engineering itself because when the company stopped doing that, it ran into trouble. That was the main message that Rometty brought home to Wall Street yesterday.

The eras of computing, according to IBM CEO Ginni Rometty

Everyone would probably agree that IBM – and more precisely its predecessor established by Herman Hollerith of Columbia University that created a working punch-card tabulator – ruled the tabulating machine and mainframe eras, at least enough to get it into trouble with antitrust authorities plenty of times. IBM had a bit of trouble during the client/server era, however, as Rometty conceded.

"We participated, we did not lead, and you will recall that era as the time we almost died," Rometty said.

Reinvention and resurrection

With the initial Web explosion, IBM reinvented itself and did e-business, bringing out WebSphere middleware and, importantly, has been constantly building new technology and acquiring other bits to turn WebSphere into a portfolio of products that are still worth paying for. (Argue amongst yourselves if she is right.) And this new "smarter computing" era, driven by big-data munching, plays to IBM's strengths in systems development rather than pinpoint products. "When you tour the labs, they are systems – hardware and software, integrated together," Rometty said.

With the advent of its Watson question-answer machine a few years back and the first wave of commercialization for it, IBM is looking ahead to a "cognitive systems era" in which machine learning and multi-modal decision support systems help banks and investors make better financial decisions, help doctors make better diagnoses, help lawyers make their arguments (rather than just root around like a search engine in briefs for precedence), and help companies do telemarketing by adding computer-assisted persuasion to their call centers.

This cognitive era also involves things such as the Human Brain Project, an €1bn effort by the European Union and headed up by Big Blue, to map the human brain over the next decade, and Project Synapse, which is a neurosynaptic supercomputer being built by IBM and funded by the US Defense Advanced Research Project Agency.

In the short term, Rometty is so excited by the big-data opportunity that IBM is boosting its expected run rate in sales in its 2015 financial model such that it now expects $4bn more dough a year from sales of big-data hardware, software, and services in 2015 than it thought was possible last year. IBM had around $10bn in big-data sales in 2010, and now expects that to be doubled to $20bn by 2015 rather than the $16bn it was projecting last year.

In addition to big data, IBM is obsessed about having software – generally cloudy software – that helps companies do marketing, run their supply chains, and manage their people. "This is a front office transformation, and it is the biggest change since ERP," said Rometty.

Two things. First, under the Gerstner regime, when IBM's core systems business was under attack from so many different fronts it was worse than Napoleon or Hitler in central Europe, Gerstner stayed away from application software and emphasized services as a way to make money.

Second, IBM today is perfectly content to compete with packaged software and other people's cloudy software in the areas above, and its software portfolio has been driven by acquisitions. Ditto for systems, where it was necessary to add capabilities, such as Blade Network for switching, Netezza for data warehouse appliances, and Texas Memory Systems for flash-based server storage.

IBM has focused its 35 acquisitions since 2010 in five key areas

IBM is going to continue to be cautious about acquisitions, as well as keeping the pace up, and will divest itself of businesses that don't generate enough profits.

In the past decade, Rometty said that IBM had divested itself of $15bn in revenues, and if it had not done that it would have been a bigger and perhaps faster-growing company. "But we would be a way lesser-margin company," she said, "and I would argue that we would have capabilities that our clients would be less interested in."

On the acquisition front, IBM will play it the way it has been playing it for the past two decades, more or less. "We think companies get into trouble when they acquire something that takes them into an entirely different space," Rometty said, and in a dig at HP and its ill-fated $10.4bn acquisition of Autonomy, she said that when companies do a big acquisition to "ignite transformation," then "that's trouble."

In his presentation, CFO Loughridge said that of the 33 acquisitions done in 2010 through 2012 inclusive, 27 are running ahead of plan in terms of the profits that they are generating. Generally speaking, he said, IBM wants an acquisition to be accretive to profits in maybe two to three years, and many deals are already profitable, some of them only having been done last year.

Ironically, the trick is to use big data. IBM Research has cooked up a deal-data muncher called Prism, and has pumped into it all the feeds and speeds of the 140 companies that IBM has bought in the last decade, for which IBM paid $33bn. It includes all the data about those companies before IBM bought them and after it put them into the IBM marketing machine, which spans 170 countries. Prism helps smaller acquisition teams at IBM do better deals.

"I think everybody would agree that your odds for success are higher for ten $1bn acquisitions than for one $10bn acquisition," Loughridge explained, taking another dig at HP-Autonomy. "The difficulty is that you have to be able to put ten teams in parallel on the field at the same time. That's really a challenge."

But it's one that IBM is up for, thanks to the Prism system. Big Blue did 17 acquisitions in 2010, which Loughridge characterized as one of the most successful batches of deals that the company has ever done in its history. It is, of course, impossible to verify that, but what can be said is that IBM's software revenues and profits keep growing even though IBM is not exactly well-known for its software. ®